Auto Industry Merger Mood Still Alive
And one West Michigan firm was a big part of it.
Mergers and acquisitions worldwide jumped 35 percent, from 462 deals in 2001 to 621 last year, according to the recent annual report on global automotive merger and acquisition activity by Pricewaterhouse Coopers.
Mega deals drove the value of global mergers and acquisitions to $35.1 billion, up 85 percent from the $19 billion in 2001 but still well below the valuation peak of about $80 billion just four years earlier, Pricewaterhouse Coopers reported.
In the component supplier sector, the number of deals in 2002 totaled 274, up 24 percent from the 221 in 2001. The rate of supplier mergers also exceeded the previous peak of 1998.
Supplier mergers and acquisitions were valued at $16.2 billion, up from about $11 billion in 2001.
The 2002 activity includes Canadian supplier Magna International’s $389 million deal to acquire the former Donnelly Corp. in Holland, a transaction that created the world’s largest automotive mirror supplier, MagnaDonnelly.
In terms of valuation, the Donnelly acquisition by Magna International that closed in October was the fifth largest of the year worldwide.
While the billion-dollar deals of the 1990s are not as common today, the report indicates that a substantial increase in merger and acquisition activity shows a “second phase” of consolidation.
The report says that activity within the automotive industry is occurring in the Tier 2 supplier community.
“The middle market is where the consolidation is happening,” said Michael Burwell, the U.S. head of Pricewaterhouse Coopers Transaction Services Automotive Group.
A main driver of the trend is a need for Tier 2 suppliers, particularly “commodity suppliers” such as metal stampers and plastic molders, to generate critical mass, cost savings, higher volumes and a broader geographic market coverage to meet the increasing demands of automakers, Burwell said.
Another factor involved is the need for Tier 2 suppliers, experiencing financial problems because of pricing pressure from customers, to sell out or find a partner in order to continue in business, he said.
Those dynamics meet with a push by Tier 1 suppliers that are in a buying mode in order to have more control over their supply chain, greater production capabilities that are demanded by automakers and to grow the business through acquisition.
“It ultimately comes back to shareholder value. People are looking to generate value,” Burwell said.
An indication of the acquisition trend is seen in the decline in the average value of supplier mergers, which has fallen from $294 million as recently as 1999 to $125 million in 2002.
Primarily driving the decline were deals that involved smaller companies, reflecting the shift in consolidation focus from the large Tier 1 suppliers that dominated deals in the late 1990s.
The supplier sector today is “characterized by aggressive, middle market consolidation within Tier 2,” as well as Tier 1 suppliers that have been disposing of their non-core business units.
“The figures underline our view that consolidation in the sector is far from over,” the report states.
“Tier 2 component suppliers continue to account for a significant slice of the action.”
Pricewaterhouse Coopers expects the trend to continue as the automotive supplier sector goes through a period of consolidation and restructuring in the supply chain.
Pricewaterhouse Coopers last year predicted that by 2010 — as mergers and acquisitions continue unabated — the number of Tier 1 and Tier 2 automotive suppliers globally will dwindle from more than 10,000 today to around 800.
Also contributing to the decrease in the average valuation of supplier deals since 1999 is the fragile stock market and economic uncertainties that have resulted in lower-valued companies.
The Pricewaterhouse Coopers report states that net effect is the creation of “something of a buyer’s market.”
The report says this market lies in companies that originally intended to sell out but now are being coy.
The report indicates that with prices down, such firms have been holding back from actively marketing themselves in hopes that values will pick up again.